Current yields for treasury bond, Financial Management

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ACT presently is all-equity financed. This reflects the stance of the former CEO, a dominant personality who stated repeatedly: "I don't want us to be in thrall to the demands of the banks". However, since appointment of a new chief, change is in the wind and the new CEO is obviously thinking about use of debt to augment the present equity finance. In this regard, the CEO has sent you an email that has just reached your inbox, containing the following points:

a) I am aware that ACT is too small to obtain a bond rating, but in 2010 the Federal budget announced plans for a new scheme that will enable small bond issues (at least $50 million) to be listed on the ASX. What requirements would we have to satisfy in order to qualify for listing?

b) If we made an issue with a face value of $50 million for 5 years, what would be the approximate yield required by investors? My friend, who works for PIMCO (Australia), has told me that we would have to offer about 2.5% p.a. above the yield on Commonwealth Treasury Bonds.

[Assume that the bonds would be issued at par, with half-yearly coupons]

c) Pimco has also advised me that there would be issue costs of about 2% of the face value. What impact would that have on an issue?

d) I have heard mention of a 'discount bond'. Would we benefit from this for our bonds? Can you show me how this works?

e) I have seen in recent times that some of the big Aussie banks issued covered bonds, apparently at attractive yields. What are they and are they suitable for us?

To answer the CEO's email, you have researched the current yields for T-bonds, which include the following observations:

maturity

yield

1 year

5.8%

3 years

5.9%

5 years

6.1%

10 years

6.3%

Required:

Write a brief response to the CEO's email, addressing points a) to e).


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